Prop G: San Francisco’s Real Estate Wolf in Sheep’s Clothing

When San Franciscans head to the ballot box on November 4th, one of the most divisive hot-button issues they’ll face will undoubtedly be Proposition G. The proposed measure would tax any seller of a multi-unit residence who has owned the property for less than six years, with the levy weighing in at a massive 14 to 24 percent of total sale price, depending on duration of ownership.

At face value, the measure—first proposed by a coalition representing concerned city tenants—seems noble enough. There’s worry among renters that speculators who flip properties in today’s hot real estate economy will leave many tenants priced out of their neighborhoods. But unfortunately, when it comes to the particulars of the proposed measure, it’s about as regressive an act for the average San Franciscan—not to mention the city’s thriving economy—as one could imagine.

The most glaring issue is that while Prop G is intended to keep prices down, it will by its very nature have the opposite effect. That’s where a correlation between demand and upward pricing comes in.

San Francisco is arguably the most desirable metro in the country, and during the real estate boom of the past two years, local buyers have usually only been able to crack the market when making all-cash offers or offers way above asking price. After all, the average San Francisco home that required no price change sold for 17 percent above initial list price in Q2 2014.

At $1.543 million, this average home sales price in Q2 was the highest the city had ever seen. These figures make sense in terms of demand affecting price given that the September 5th report by Altos Research listed only 269 single-family homes on the market. That number comes for a city of nearly 850,000.

Where Prop G becomes an issue in this scenario is that its crippling taxes would only serve to lessen the already meager number of homes on the market. Since sellers have to wait six years to be exempt from the proposal, many would simply decide not to sell, further decimating the city’s inventory level.

“The biggest concern that the real estate community has with Proposition G is the adverse effect that it will have on the supply of residential housing in San Francisco,” says Dierk Herbermann, McGuire Managing Broker and General Counsel. “This isn’t about taxing speculators, it’s about harming the small residential owners who make up the largest segment of our housing market.”

Herbermann’s example speaks specifically to the type of home owners who have been instrumental in rebuilding the city’s post-recession economy. Take for example, a tech worker who bought a multi-unit property in the last year and is now forced to sell because of either job loss or job relocation. Putting this type of home owner under the Prop G umbrella of speculators is obviously a reach. Still, if they were forced to sell because of such circumstances they’d be hit with a 24 percent tax on their home sale, giving a $1.5 million home an actual net of only $1.14 million. That’s roughly $360,000 lost on the Q2s average home sale price simply due to Prop G.

However, there is an alternate scenario. Inventory levels could stay at least slightly around their current level. The only issue would be that sellers of multi-unit residences would be forced to figure in Prop G taxes into their asking prices. In turn, this would only enable property values to rise by 14 to 24 percent for all those looking to turn a pre-Prop G profit. What would happen to the disgruntled renters? They would simply have to eat the cost of Prop G taxes that their landlords figure into rent after overpaying a Prop G-constrained seller.

“Prop G is an ill-considered 24 percent tax on the already expensive cost of housing,” adds McGuire President and CEO, Charles E. Moore. “It is not a solution for creating more affordable housing, in fact this regressive tax will have the opposite effect by making housing more costly.”

As November 4th nears, the biggest question surrounding Prop G is not if it will incrementally raise rent. It’s if passed, how massive a hit will it take on the city’s home inventory levels and overall economy, and how high will multi-unit prices rise?